GCR Q2 2019

Learning to fly

Charles McConnell

03 June 2019

Learning to fly

Equipped with a new competition law as of December 2015, Hong Kong has embarked on an ambitious journey to bring strong enforcement to one of the world’s richest, but smallest, territories. Charles McConnell watches the fledgling enforcer’s first forays into antitrust.

As Hong Kong has plunged into what it hopes will be a robust era of antitrust enforcement, the growing pains for an agency enforcing a new competition law are visible. The Chinese special administrative region introduced the Competition Ordinance in December 2015, and the Competition Commission referred its first case to the Competition Tribunal about 15 months later. The commission accused a handful of information technology companies of conspiring to file dummy bids during a tender for the installation of a server system at the Hong Kong Young Women’s Christian Association.

Practitioners in Hong Kong say it was an interesting case to bring as the first one, given the unclear fact pattern and questions about whether the association should have known that there were dummy bids. Nearly two years later, the tribunal issued a decision on the case, but there very well could be an appeal. It was not the open-and-shut, classic cartel case that several thought the commission would pursue first.

Experienced pilots

Since the enforcer brought that first case against the IT companies, it made a slew of personnel changes, including hires from established competition jurisdictions. They have unquestionably shaped enforcement and given the agency a specific vision about the future.

Chief among the new additions was Brent Snyder, who left his post as the deputy assistant attorney general for criminal enforcement at the US Department of Justice’s antitrust division to take over as the chief executive of the Hong Kong Competition Commission in September 2017. A month later, the commission introduced Jindrich Kloub as the executive director of operations, a role in which he oversees the commission’s cases. Kloub had spent his professional career at the European Commission’s Directorate-General for Competition. In May 2017, the commission brought in Lilla Csorgo to be the chief economist. She had led the economics department at New Zealand’s Commerce Commission and spent a couple of years as a vice president at Charles River Associates. Steven Parker, formerly of the Hong Kong Monetary Authority and Hong Kong Department of Justice, joined as the executive director for legal services in July 2017. Still at the commission from the old guard is Rasul Butt, who has been the senior executive director since July 2016.

illa sorgo chief economist at the ong ong ompetition ommissionLilla Csorgo, chief economist at the Hong Kong Competition Commission

At the time of Snyder’s appointment, observers expected an uptick in activity, and they have not been disappointed. Beyond the additional cartel case brought since his arrival, the commission has been investigating several of Hong Kong’s industries. It has dealt with multiple exemption requests and is taking a look at a shipping alliance among four of the five port terminal operators at Hong Kong’s main container shipping facility. Snyder has also pushed on advocacy, reaching out to businesses, schools, lawyers and consumers to educate the population about antitrust law and what it means for them.

When competition law is newly introduced to a jurisdiction, a top enforcement priority is bringing cases to get some precedent on the books. Businesses also support that so long as they are not the defendants, as case law helps to clarify what type of behaviour the enforcer will prosecute and what standards the courts will apply when assessing such conduct. And that’s what Snyder and the Competition Commission team have done. The agency technically filed its second case a couple of weeks before Snyder got to Hong Kong, but the third case has followed a largely similar fact pattern, with the only major difference being the inclusion of individuals as respondents. The commission has also said that it will likely bring two or three new cases each year.

David v Goliath

Put aside the first case, which had respondents that were subsidiaries of major global companies and could afford international law firm legal representation. The second and third cases are much closer to bread-and-butter cartel prosecutions.

In August 2017, the commission accused 10 small to medium-size companies of fixing prices and allocating the market for decoration services at a public housing estate in northern Hong Kong. The value of the contracts was small, but the commission believed it had a solid case against the companies for their behaviour. And it was a good case for the commission as a matter of optics. The agency was taking aim at companies that allegedly took advantage of vulnerable consumers – local citizens who rely on public housing.

Goliath

As in any prosecutorial system, the respondents had a chance to put on a defence before Hong Kong’s Competition Tribunal. But it was very different from the scenes of recent cartel prosecutions in New York and London courtrooms, where one would find high-powered, well-paid litigators from the world’s biggest law firms representing the defendants and experts who charge even more than the lawyers duking it out to convince a judge or jury.

In the second case before Hong Kong’s specialist court, that picture was only present for one side – the Competition Commission.

English QC Daniel Beard led the Competition Commission’s arguments

Daniel Beard QC at Monckton Chambers in London, who acted for the commission, is the definition of a “big gun” when it comes to putting on a competition case. His resume includes merger, conduct and damages matters before enforcers and tribunals – most notably, he argued successfully for Intel in its landmark antitrust appeal to the European Court of Justice. Well versed in UK and EU competition law and in courtroom rapport, Beard eloquently presented the commission’s arguments to Justice Godfrey Lam Wan-ho.

He was flanked by lawyers from King & Wood Mallesons, which also represented the commission during the case. For economic evidence, the commission retained the services of Oxera Consulting. And lastly, the commission had itself – the resources of a government agency. Snyder and Kloub, unquestionably experts in their field, often spent the morning or full day during the three-week hearing observing the proceedings from the courtroom gallery.

ustice odfrey amJustice Godfrey Lam

David

Meanwhile, only one of the lawyers who represented the 10 small companies had ever practised competition law in any meaningful way prior to this case. Carter Chim, who spent a few years at the Competition Commission and now teaches competition law at the Chinese University of Hong Kong, was one of the lead lawyers for the defence. Still, his experience paled in comparison to those he was going up against. And Chim was called in to represent two of the respondents only after their previous lawyers proved to be inadequate.

Aside from the unaffordable price tag of Big Law, local lawyers familiar with the case have said that Hong Kong companies faced with competition concerns for the first time do not yet even know where to turn for competent advice. The case was presented in English – nothing new for the judicial system of the former British colony, but not the first language of any of the defence lawyers.

The defence was able to secure an expert with more than two decades of antitrust experience: Sharon Pang, who is the principal economist for competition at Deacons law firm in Hong Kong. Previously at Charles River Associates in Washington, DC, where she prepared economic expert reports and submitted written declarations to US federal courts, she also has presented economic analysis to the US DOJ and FTC staff regarding antitrust investigations and merger reviews.

The combat

The case centred on allegations of price-fixing and market-allocation, which infringed the Competition Ordinance by object, the commission claimed. But, as it is one of the first few antitrust cases in Hong Kong, no precedent explained exactly what that entails. In the absence of guidance specific to Hong Kong on standard of proof, assessment of evidence or anything else, the court’s decision in this housing decoration case will break ground on several key issues.

The commission argued that the legislative intent behind Hong Kong’s competition law closely mirrored the EU’s, and should be interpreted as such. Object infringements – fixing prices, allocating markets, restricting output and rigging bids – are anticompetitive on their face and need not be attached to a theory of harm, Beard argued to Justice Lam. The Competition Tribunal should not stray from precedent in the EU and force the commission to present a theory of harm, the British barrister said; doing so would essentially turn a by-object case into a by-effect one. The commission also took the position that the burden of proof for an efficiency defence lies squarely with the defendants. Indeed, the commission has put out guidance on the first conduct rule, which covers hardcore cartel behaviour. “Where an agreement has an anticompetitive object, it is not necessary for the commission to also demonstrate that the agreement has an anticompetitive effect,” the guidance states.

On the companies’ side, Chim urged Justice Lam to send Hong Kong on its own path; one separate from the EU and made wiser by the more developed juris­diction’s mistakes. EU jurisprudence has created uncertainty, in that allegations of price fixing and market allocation are essentially criminal charges that are assessed under a civil standard. The EU carries too much of a historical burden from its case law and “can’t even call a spade a spade”, Chim argued during the hearing. The Hong Kong Competition Commission must substantiate its allegations by providing a theory of harm showing that consumers actually suffered, he contended. And when the defendants offer a plausible argument that their conduct had some pro-competitive benefits – as they did here – Chim asked how the court could avoid an effects analysis.

Hectar Pun at Denis Chang’s Chambers, who represented one of the companies, urged the tribunal to assess the allegations under the criminal proof standard: “beyond a reasonable doubt”. Respondents must be afforded the presumption of innocence, he said, and it should be the commission’s burden to rebut any plausible defence – that the conduct was pro-competitive – beyond a reasonable doubt. The economic efficiency argument is no different to any other lawful defence, Pun said. Further, the commission has substantial investigative powers – including the ability to compel evidence and testimony – so it would not be too burdensome or difficult for the commission to prove whether conduct is exempt from the Competition Ordinance owing to alleged economic benefit, the defence lawyer said.

The spectators

One lawyer speaking on the condition of anonymity agrees that the prosecution of the decorators seems like a David versus Goliath situation. Pushing it a step further, however, the source says this case could even involve “issues of natural justice” – whether the hearing was fair and free from bias, pillars widely viewed as crucial to maintaining public confidence in a legal system. The decorator cartel case raised questions about whether the respondents were able to get the right representation, the source says. “If they can’t afford the right counsel, where does that leave them?” the lawyer wonders.

Those questions have been asked elsewhere, particularly throughout southeast Asia, where most of the competition regimes are still trying to overcome growing pains. When competition laws are introduced for the first time, a country’s bar may be ill-equipped to provide adequate defence at the outset. Several major international and regional law firms have taken it upon themselves to train the local lawyers in these jurisdictions that are new to competition law.

Another competition lawyer sees an irony in small companies being under investigation for alleged anticompetitive conduct, when they, along with consumers, were the intended beneficiaries of the law. “Is this the system working at its best?” the source asks.

Natalie Yeung, a partner at Slaughter and May in Hong Kong, says that to the Competition Commission’s credit, it is aware of the concern about the local bar’s unpreparedness and wants to ensure smaller firms are adequately equipped to represent defendants. But that is unlikely to fix the situation in the near term. The problem also is highlighted by the fact that small businesses are involved in two of the first three cases the commission has taken to court, she notes; the battle before the Competition Tribunal may be on a more level field when the commission brings cases against bigger companies.

Yeung does not disagree with the commission’s approach to go after serious anticompetitive behaviour at the outset. The commission has been clear that its enforcement priority is cartel conduct, and consumers can be vulnerable even if the cartelists are small, she says. What is important right now for Hong Kong is to gain clarity of the law, Yeung says, which can only be done by the commission bringing cases before the tribunal.

Alastair Mordaunt at Freshfields Bruckhaus Deringer in Hong Kong says the commission might get a couple of good wins, but he questions the overall deterrent effect of low-value cartel cases. Perhaps they will deter similar conduct within the affected sectors, he concedes, adding that the start of any competition regime is “a journey”. Blockbuster cartel cases create stronger deterrence than the “low-hanging fruit” that the commission has pursued in its second and third cases, Mordaunt says, but they take a lot more time and resources.

A spokesperson for the Competition Commission says the agency “prioritises matters that have the strongest direct consumer impact as well as the strongest evidence, regardless of the size of the companies involved”. The conduct in question in the second case constitutes serious anticompetitive practices that could harm consumers, other businesses and the economy as a whole through reduced choice and supracompetitive prices, the spokesperson says.

That conduct is “particularly egregious when the people directly affected are public housing estate residents who are some of Hong Kong’s most vulnerable consumers”, the spokesperson adds. “Nonetheless, the commission has also shown its willingness to take enforcement action against large companies in its first bid-rigging case.” The prosecution of the information technology companies pitted the Hong Kong enforcer against defence counsel from the likes of Latham & Watkins, Allen & Overy, Baker McKenzie, Linklaters and Norton Rose Fulbright.

The commission’s spokesperson says it plans to push even further to educate the community by providing in-depth training for small and medium-sized companies and law firms, including non-antitrust lawyers, in 2019. The goal is for the local bar to “be better-equipped to provide compliance training or handle competition cases” for such clients, the spokesperson said.

To lead or follow

In many ways, the courtroom during Hong Kong’s second competition case typified what all fledgling enforcers encounter. The world has about 130 antitrust regimes, but they are at varying stages of maturity. Even the most sophisticated agencies disagree about many issues, including burdens of proof and whether certain conduct is anticompetitive. Still, new agencies generally turn to the precedent set in the US and Europe, and often take years before they consider making their own waves.

Justice Lam released his decisions on the first two cases on 17 May, largely following the EU – but also the UK, Australia and the US on certain issues. He said that it would not make sense to ignore EU precedent given the similarities between EU competition legislation and the Competition Ordinance and the first conduct rule for hardcore cartels. “EU case law is of obvious value in relation to the interpretation and application of the first conduct rule,” Justice Lam wrote.

In one important area, however, he stuck with Hong Kong precedent. He disagreed with the commission’s submissions and held that the standard of proof to show a violation of the competition laws is “beyond a reasonable doubt”. That criminal standard diverges from the norm in several other jurisdictions that pursue only civil charges against bid-riggers, such as the EU. But Justice Lam said he was bound by Article 11 of Hong Kong’s Bill of Rights. This provision “precludes this tribunal from adopting the civil standard where pecuniary penalties are sought and the proceedings are to be classified as involving a determination of a criminal charge,” he wrote.

Contrary to the ending in the biblical story, David did not slay Goliath in the decorators’ case. The third case referred for prosecution has a similar fact pattern: small, local companies accused of collusion in the market for public housing renovations. Those respondents may settle for fear that the commission will repeat the success it had against the decorators. However, if the third case does make its way to a full hearing at the Competition Tribunal, it will be the first not before Justice Lam – which could open the way for a different interpretation of the law.

If you enjoyed this article, you may be interested in signing up to GCR Asia’s free weekly news alert, which delivers the latest developments on antitrust enforcement and litigation in the Asia-Pacific market straight to your inbox.

Previous Chapter:China takes down the walls

Next Chapter:Cementing a legacy

Comments Add your comment

Add Your Comment